I ditched corporate America in 1994 and started a management consulting and venture capital firm (http://petercohan.com). I started following stocks in 1981 when I was in grad school at MIT and started analyzing tech stocks as a guest on CNBC in 1998. I became a Forbes contributor in April 2011. My 11th book is "Hungry Start-up Strategy: Creating New Ventures with Limited Resources and Unlimited Vision" (http://goo.gl/ygaUV). I also teach business strategy and entrepreneurship at Babson College in Wellesley, Mass.

Will Exablox Cut NetApp's Revenues?

Established data storage providers charge their customers a hefty price to keep up with the explosion of corporate data. This makes companies willing to overcome their fear of betting on a startup so they can keep their IT budgets from exploding as well.

And if those startups succeed, there is a real threat to investors in shares of NetAppNetApp. NetApp did not respond to a request for comment.

One such startup, Mountain View, Calif.-based Exablox — its storage system lets customers to add standard disk drives to their storage servers — threatens to cut into the revenues of big storage providers by offering customers the ability to store a huge amount of data for a much lower price — this is an example of what I call a Quantum Value Leap (QVL).

Founded in 2010, Exablox does this by saving customers 96% of the price that they would pay if they shopped at NetApp. Specifically, Exablox charges customers $41,000 for a petabyte — 1,000 terabytes – of storage while NetApp charges about $1 million, according to CEO Doug Brockett.

NetApp 6030 Filer Head (fisheye) (Photo credit: ChrisDag)

Exablox is only a threat to NetApp if lots of customers decide that they are willing to take the risk of doing business with a startup to buy their petabytes at a 96% lower price. If that started to happen, NetApp might feel compelled to cut prices on its products.

But that would cut into its 9.6% profit margins. And NetApp is not exactly booming anyway. Its revenues grew a scant 1.6% in the last 12 months while its net income fell nearly 17%.

Moreover, while the storage market is growing, it is about to downshift in the view of Deutsche BankDeutsche Bank hardware analyst Sherri Scribner. As she wrote in an April report, ”we believe the storage market is just now beginning to be pressured by the need to better utilize existing storage hardware.”

The pressure is on because data is growing fast and companies can’t afford to add enough people to keep up. ”Enterprises today operate in an environment where increasing the amount of storage means increasing personnel costs at the same rate, an unsustainable model when data is growing at rates of 40% to 60%,” wrote Scribner.

She expects virtualization — the use of software to boost hardware capacity utilization — to send storage hardware growth on the same downward path that it sent server hardware. Quoth Scribner: “Just as server virtualization is targeting taking full advantage of the processing power of servers, the goal of software defined storage (SDS) is to better utilize the disparate storage resources in a datacenter in order to better manage and control storage growth.”

And she believes that companies that can deliver storage virtualization are likely to benefit while those that don’t will suffer a slowdown. “We expect the impact of SDS strategies by enterprises to be a negative drag on storage growth over the next few years, although we see this as somewhat offset by continued data growth,” according to Sribner.

And she is not bullish on NetApp because she believes that its small and medium-sized business customers (SMEs) are moving more storage to the cloud and that NetApp’s product for cloud service providers– Clustered Data ONTAP — has some good features but is not likely to be a big revenue generator.

Exablox — which has raised about $30 million in venture capital – was started to solve the problems that Tad Hunt, co-founder and CTO, encountered in his own life. When he worked for a startup all the product developers had to spend at least 12 hours a year deleting unnecessary files. He did some calculations and concluded that it imposed an “enormous cost to the company of this fruitless task.”

Hunt tried to solve the problem by purchasing disk drives at $150 to $250 a piece from computer retailer Fry’s. Then he went rock climbing and tried to save his photos and videos to storage servers but the files consumed too much expensive disk.

Exablox meets the needs of SMEs which are willing to get more storage capacity cheaply even if it slows down data storage and retrieval. Exablox delivers that as well as SMEs needs for figuring out of to make the best use of available storage capacity and compressing data before it’s stored.

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